Investor Event

Vale, Glencore Break off Talks over Canada Nickel Deal

Vale and Glencore have broken off talks over combining their nickel assets in Canada in a deal that could have produced over $1 billion in annual cost savings, sources close to the matter said.

The discussions over linking the two companies' neighboring nickel mining and processing facilities in the Sudbury basin in southeast Canada broke down partly due to disagreement over how to share the costs and savings and to worries about government and labor union reaction to potential job cuts and shutdowns, the sources said. At the same time, a recovery in nickel prices has made cost rationalization less urgent, they added.

"Both sides more or less agreed on what the optimum structure of a combined Sudbury business would look like, but to enable that to be created, very difficult decisions needed to be taken, and the appetite or the ability to take those decisions was not there," a source with knowledge of the situation said.

One of the sources said differences in corporate culture -- with Swiss-based trader and mine operator Glencore more willing to take risk and Brazilian miner Vale more conservative -- also played a role.

A combination of the nickel assets in Canada had already been attempted by their previous owners, Inco and Falconbridge, which in the mid-2000s came close to an agreement before they were acquired by Vale and Xstrata.

The talks between Vale and Glencore, which bought Xstrata last year, started in late 2013, when the nickel price was hovering around a four-year low. The companies were at the time hoping to seal a deal in early 2014.

In January, major exporter Indonesia imposed a ban on the export of nickel ore to boost downstream investment in the country. This was a game-changer for the nickel market, pushing the price up by more than a third so far and making the need for cost-savings and restructuring less pressing.

At the end of April, Vale Chief Executive Murilo Ferreira said it was still discussing a partnership with Glencore. Since then, comments on the deal from executives on both sides have turned pessimistic.

With the Indonesian ban in place for the foreseeable future, the talks between Glencore and Vale are unlikely to resume, the sources said.

"If the nickel price were still weak, then a lot of these operations would be under water, and the imperative to cut costs acts as a very great focus for management," Bernstein Research analyst Paul Gait said.

"But the nickel price has recovered and that makes any kind of restructuring much harder to achieve. It becomes very difficult to persuade the government and a highly unionized workforce that restructuring is needed when you have cash-positive operations."